The Chicago Board Options Exchange has had to open a futures trading market in order to launch the VIX Futures based on its VIX Volatility Index product. It is due be launched in March as the first product listed on the new Chicago Future Exchange electronic market.
Up to now the CBOE has only traded options, where it is the biggest market in the US, says David Gray of the exchange. “The SEC told us that since it was structured as a future it would have to be traded on a futures market, so we set up CFE.” Options on VIX will be listed by CBOE.
The VIX product, which provides a “minute-by-minute snapshot of expected stockmarket volatility over the next 30 days”, now uses options on the S&P500 index rather than the S&P100 and has a new formula for calculation.
The index, known as the ‘investor fear gauge’ reflects investors’ consensus view of expected market volatility, with option prices tending to rise in times of turmoil, which the VIX reflects.
The new methodology adopted for calculation of VIX provides a foundation for tradable products based on the new version of the index. “The new VIX still uses a weighted average of options with a constant maturity of 30 days to expiration,” says the CBOE.
The new futures and options contracts will be the first of a family of volatility products. They will enable investors to take advantage of a market view on the direction of near-term volatility. In addition to hedging volatility risk, they will be able to manage risks associated with the growing markets for volatility and variance swaps, says CBOE.